Crisis-Proof Your LLC Operating Agreement by Defining These Six Important Material Terms

Posted on January 15, 2015

The best way to ensure the health and longevity of your LLC is to create a detailed and specific operating agreement from the onset. While things may look bright during the start up phase, your organization may enter rocky territory down the road. Should that happen, questions will be raised that should ideally have immediate answers. No one should have to resort to a full-blown legal dispute rather than simply referring to the stated clauses of the operating agreement.

To help your company avoid tearing itself apart at the seams during the first sign of trouble, define the following six material terms as explicitly as possible when creating your operating agreement:

Respective Economic Interests for Members

The most important factor to establish is ownership. Your organization exists as a collaboration between primary investors and board members. Like a well-built house, every member acts as a separate component that creates an overall stable corporate structure.

Let everyone know their role in keeping this structure aloft. Capital investment interests should be clearly outlined, along with the percentage of ownership that each contribution warrants.

How rights will be apportioned should also be delineated. Most corporate bodies hold votes according to held interest percentage. You can choose to adopt this system, or you could create something more tailored to your business practices.

Make sure to include financial rights and obligations of members, as well. Documenting how losses will be covered by each member is just as important as how earnings will be distributed.

Transfer Abilities and Rights

When you form an LLC, you do so in the confidence of the founding members. Now, what if one of those members were to decide they would rather allow some complete stranger to buy out their share? You suddenly have a strange new face on the board with all of the rights and powers of the person you trusted.

To avoid this precarious scenario, carefully outline the steps required to transfer interests. You should also specify whether or not members can deflect voting privileges to proxies or outside parties.

Member Withdrawal Procedures

Similar to the above scenario, what if a member suddenly wants to “cash out” their investment? This act could cripple your business, especially if it is in desperate need of that capital to maintain operating costs.

Define under what circumstances members are allowed to remove themselves from the operation. Ideally, the measure should be come to a vote. There should also be stated provisions, such as non-competition clauses to prevent former members from cannibalizing your market share.

Dissolution Protocol

No one wants to think about this day, but there occasionally comes a time in some LLCs where it becomes necessary to shutter operations for good. Your operations agreement should include detailed protocols and procedures for making such a decision and how it will play out. An important component to include would be whether or not members can negotiate an involuntary dissolution.

Arbitration and Dispute Procedures

To help your LLC resolve small problems before they become huge ones, create a procedure for handling disputes. One of the most important features of such a description is how to define and resolve issues of misconduct. You should also install a process for arbitration when two internal parties cannot come to a mutually-agreed resolution.

Part of this procedure should include questions of transparency. Who has a right to audit the company records, and under what circumstances?

Delegation and Normal Operating Procedures

This section would obviously be the “meat” of your operation agreement. It defines the powers of members to select managers along with what responsibilities each manager will have. Including incredibly specific job descriptions in this section will help to clear up any confusion regarding responsibilities and chain-of-command.

There are many, many more components that can help preserve your LLC through stormy weather, possibly hundreds. However, taking the time to carefully craft the preceding six terms will go a long way towards building a strong foundation for your LLC.

If you have any questions or concerns regarding contract law, please do not hesitate to consult the law offices of real estate lawyer Miami FL, Marlyn J. Weiner. We are available as one-time consultants, or we can provide continuing services to keep your corporate structure legally informed on all matters. Visit our Practice Areas page to learn more. Our offices are conveniently located in Boca Raton and Miami.